Low expectations for economic sea change in Japan

By Alan Wheatley / Reuters, LONDON

All this makes Japan something of a laboratory experiment for economic and social policy.

According to the UN, both the US and the eurozone are expected over the next 20 years to experience the same decline in the share of their 15 to 64 age bracket — a drop of nearly 10 percent — as Japan in the last 20 years.

Italy and Germany have particularly adverse demographic profiles.

“If Europe today accounts for just over 7 percent of the world’s population, produces around 25 percent of global GDP and has to finance 50 percent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life,” German Chancellor Angela Merkel told the Financial Times in an interview published on Monday last week.

On the face of it, Japan is a prime candidate for the combination of belt-tightening and deep-seated reform that Merkel tirelessly presses on the eurozone.

Nominal GDP is lower today than it was in 1992, greatly exacerbating the debt-to-GDP burden. Aggregate hours worked in Japan over the past 20 years have fallen by a whopping 15 percent, whereas they increased in the US and the eurozone, Nathan Sheets with Citigroup in New York calculates.

Although the female labor participation rate in Japan has reached US and European levels, the working-age population is projected by the government to drop another 7.7 million, or 9.4 percent, this decade. Immigration to offset the decline is strictly controlled.

“Do you want to have a rising labor force or not? Japan has so far decided ‘no’ and that sets the determinant for growth, full stop,” said Jim O’Neill, chairman of Goldman Sachs Asset Management in London.

With Japan under no bond market pressure, O’Neill sees nothing to suggest that Abe will embark on the sort of difficult reforms to enhance productivity and growth that the likes of Ireland, Portugal and Spain are pushing through.

However, he said Japan’s circumstances raised a broader question: Why should an already wealthy society risk its famed social harmony by subjecting itself to wrenching change just to maintain its lead over new, aggressive competitors?

After all, Japan has continued to increase its per capita GDP over the past two decades — albeit by much less than the US and the eurozone — and its unemployment rate remains enviably low.

It might be quite rational, as long as markets keep cooperating, for Japan to stick with its “happy depression,” O’Neill said.